Monday Market Mark-Up – 50 Ways to Dump the Dollar

"The problem is all inside your head", G20 said to me
The economy's an easy fix if you don't want to wait
All we need to do is globally inflate
There must be fifty ways to dump the dollar

G20 said it's really not our habit to deflate
Furthermore, we have elections and the voters hate to wait
So we'll indebt ourselves, buy lowering the rates
There must be fifty ways to dump the dollar
Fifty ways to dump the dollar

You just buy a few Yen, Wen
Push up the Pound, Brown
You buy up the troy, boys
Give Goldman the fees
Take the IMF bling, Singh
Let it drop like a rock, Barack 
Act like you're bored Jean-Claude
Let the dollar fall free

I heard they were dancing to this one at the G20 Meeting so I thought I'd share it with you.  Never have so many gathered so often to accomplish so little as our G20 in the past 18 months.  This weekend's meeting of the World's "top" Finance Ministers resulted in a split on whether to tax financial trading as part of a broader strategy to ensure the global economy’s expansion is less crisis-prone.  The idea of the levy was to prevent excessive risk-taking and fund future bank rescues but US Treasury Secretary, Tim Geithner said trying to get the banks to behave is "not something we’re prepared to support."

That was all the Gang of 12 needed to hear and the commodity markets went wild with the guarantee of no additional regulation on the horizon and the dollar was taken down to new lows in overnight trading, plunging to $1.50 to the Euro and $1.685 to the Pound, over 2% off Friday's lows.  They Yen Rose back to under 90 to the Dollar and the Nikkei, of course, did not like that one bit and an early rally turned into a flatline for the day.  The rest of the global markets, however, were off to the races with Europe up 1.5% at 8 am and the US futures up over a point as well as gold flies to $1,110 an ounce and oil heads back to $78.50, up $2 from Friday's low. 

Of course, doing nothing to prevent excessive speculation by the "too big to fail" crowd isn't all the G20 didn't accomplish this weekend (which is it for the year now).  They also failed to do anything to get China's Yuan off the dollar peg so the falling dollar is still great for China, who export far more than they import.  Not wanting to stop there by accidentally accomplishing something, the G20 also failed to make any progress on climate change, which is rocketing all the major polluters in global trading. 

Kudos to Gordon Brown, who TRIED to talk some sense at the meeting saying: "it cannot be acceptable that banks enjoy the rewards of their successful trades yet leave taxpayers to pick up the cost of their failures."  That gave everyone a good laugh but Geithner's opposition potentially kills off the proposal even before the IMF reports on its feasibility in April.  “A credible medium-term plan to cut deficits is needed to tackle shortfalls in public finances,” Brown said. For now, “a self-sustaining global recovery hangs in the balance.”  Man what comedy timing that guy has!  If Brown loses his election next year, I'm sure the Daily Show will be calling…

Instead the IMF did what they could to boost the price of the 200 tons of gold they are still looking to sell.  They issued a statement saying traders are probably using the dollar to fund “carry trades” across the world and the currency may still be overvalued after its slide this year.  “There are indications that the U.S. dollar is now serving as the funding currency for carry trades,” the IMF said in a report published on Nov. 7. “These trades may be contributing to upward pressure on the euro and some emerging-economy currencies.” While the dollar “has moved closer to medium-run equilibrium,” it is still “on the strong side.”    

“U.S. interest rates look to remain near zero through the first half of 2010 at the very least, which provides traders plenty of time to continue with carry trades,” said Boris Schlossberg, director of currency research at the online currency trader GFT Forex in New York. “Labor-market conditions are still very challenging in the U.S., and the rest of the world is improving faster. The dollar remains the weakest link.”  The dollar has dropped about 13 percent against a basket of currencies from its major trading partners in the past seven months. Meanwhile, the MSCI All-Countries World Index of global equities has gained about two-thirds since March and sugar has soared 90 percent this year with oil doubling and gold up 50%. The euro has risen 15 percent against the dollar in the past nine months as well. 

We'll see how far they can push things today, certainly we can expect a retest of our highs and then we'll see.  As I said in my Dec, 2006 article, "Burn Dollars to Fight Gravity," where I first predicted that hyperinflation was the most likely US solution to our debt problem: "let’s throw those dollars onto the fire and light up those market engines – we’re taking this baby to the moon!"  Yes, I did say last week that the dollar looks to be bottoming here and, hopefully, this is the blow-off before the turn.  Much like the oil predictions went from $100 to $150 to $200 as oil went from $80 to $140, the more outrageous the predictions get the more likely it is that the bagholders are feeling trapped and about to panic themselves. 

However, like any good swimmers, we know not to fight the tide and I pointed out in the Weekly Wrap-Up that we are partying like it's 1999.  By the April of 1999, the Nasdaq seemed ridiculous at 2,500, having run up from 1,500 in October.  Despite all logic to the contrary, the Nasdaq bounced between 2,500 and 3,000 until October 1999 when, rather than going down, as every rational person believed it would, the Nasdaq instead went UP – to 3,500 around Thanksgiving, 4,000 at Christmas, 4,500 by Valentines Day and 5,000 by Easter.  Sure, by Memorial Day 2000, we were back at 3,500 but WHAT A RIDE. 

So, IF we can break on through to the other side of our upside levels, then it's time to switch off our brains and just strap in for the ride.  We already have our seat-belt plays so now it will be time to make some aggressive upside targets where we can make amazing returns off big index moves.  That is IF and ONLY IF we can break out here.  Otherwise, let's see this for what it probably is, a desperate act of market manipulation by funds that are under the gun to unload their stocks by December 31st or before the dollar bounces back on them and sends the market plunging back faster than it went up – just like the Nasdaq in 2000.

So no one is actually at their September highs but the Dow is in striking distance this morning but ALL of the other indexes are more than 2.5% away from getting back to where we were last month.  The DAX was our outperformer in September and is leading Europe now but notice how closely those 25% Up numbers (off our July base) are lined up with the September highs (except the Nikkei, which peaked at 10,767 in August).  As we've often mentioned, the country most damaged by the falling dollar is Japan, and their market has been unable to gain traction as the dollar slides into the pits. 

Aside from the Nikkei, Transports are our biggest concern as they are still not over their retrace mark off the 25% line, which they also hit earlier than the other indexes.  What's going to be critical for the US, is whether we can take back those highs and hold those retrace lines.  Once again, we find ourselves looking at 1,056 on the S&P as the single most important technical point for the week, this time signaling a breakdown if it's crossed.  576 on the Russell remains our canary in the coal mine and we really need to see the FTSE get through their 25% mark otherwise, we may have nothing more than another failed breakout attempt. 

So still very skeptical but ready to move on the upside (we actually made a half dozen bullish plays on Thursday to cover this run) but nothing to panic us out of our bearish positions (55%) until those levels begin to roll green on us.

Trade carefully out there.